This chapter is from the book

When Leanne applied for a home loan, she didn’t expect to get the runaround, a pack of lies, the bait and switch, a condescending tone, and imbecilic answers to her straightforward questions. She didn’t expect to be charged meaningless fees that served no purpose except to pad company profits at her expense. She didn’t expect to engage in a royal battle just for asking what the Yield Spread Premium was on her loan. All she wanted was a low interest rate and a fair deal. Her credit scores were over 740, and she had a good income, so how hard should that be?

Leanne didn’t realize that state lawmakers were scurrying around passing insidious laws with deceptive titles like “antipredatory” that were actually making it more difficult for good, tax-paying citizens like herself to get a cheap mortgage.

If you, like Leanne, just want a low rate and a fair deal, you’ll benefit from knowing what happened to her—and how she ended up getting the world’s cheapest loan.

Save Time and Money by Learning from This True Story

After a long day at work, Leanne was relaxing on the sofa with Puddles curled up beside her when she heard the TV newsman announce that home prices had dropped again. She thought, “I should stop throwing away my money on rent and buy my own home.” The more she thought about it, the better she liked the idea of getting out of her boring beige apartment and into a home where she could paint with color and use her own decorating ideas. It would be great to have a yard of her own where she could grow tulips and maybe some tomatoes. Suddenly, she felt happy. She was going to stop supporting the landlord and invest in her own real estate.

So Leanne opened her laptop to see what interest rates were being offered and what her payment might be. Unwittingly, she clicked on an ad that said lenders would compete to get your business. At the time, it seemed like a good plan. What she didn’t realize was that it was a lead-generation service that sold your private information to lenders, who then passed on the cost to you.

The next day, her e-mail flooded with offers for loans. She fished out her yellow pad to take notes.

Bad Practice

Trusting a lead-generation service to shop your loan for you.

Good Practice

Skipping the middleman by contacting mortgage brokers or banks on your own. That way, you avoid having your credit report pulled too many times and you avoid the extra cost.

Lender A said, “No Origination Fee!” However, Leanne noticed it was replaced with a Discount Fee, which was also one percentage point. The headline was a deceptive marketing ploy. How annoying.

Lender B said, “Lowest rate!” And it was true: It did have the lowest interest rate. But there was an Origination Fee and a Discount Fee totaling 3 percent. Did they think she was going to be seduced by the rate and ignore the up-front costs? That was insulting.

Lender C said, “If they quote you a rate, but don’t include the APR (Annual Percentage Rate), they are in violation of federal law. Stay away from shady lenders like that. Always ask what the APR is.”

So she called Lender B with the lowest rate who said, “The APR is not what you’re charged on your Loan Note. The APR is a combination of the interest rate and some of the fees. The problem is that different lenders include different fees in the calculation of the APR, and all it takes is one click of the mouse to take fees out of the APR. You don’t compare APRs to find the cheapest loan.”

That was eye-opening, and this news made her distrust these lenders, who were now calling her cell phone every five minutes. She wished she hadn’t clicked on that ad. She called her sister and asked who they used when they bought their house. It was a local company she’d never heard of, but her sister said, “This guy got us a wholesale rate. You’ve gotta call him.” So Leanne did, and she learned he was a mortgage broker who shops the wholesale divisions of banks to find cheap loans.

The mortgage broker said, “I hope you’re not calling a long list of lenders asking what the interest rate is—because verbal quotes mean nothing. In fact, I can guarantee you that if you go with the person who gives you the lowest quote on the phone, you’re going with the biggest liar. Some dishonest loan officers knowingly underquote. You’ll get into your loan process and then they’ll say, ‘Sorry, rates went up.’ And there’s nothing you can do about that. They never intended you to have that lowball, impossible interest rate. It was just a way to get you in the door.”

“What should I do then?” she asked.

“You have to get a written Good Faith Estimate. That will show you the terms of your loan, the rate, all the fees and costs, and your monthly payment,” the broker said. Then he offered to e-mail Leanne a Good Faith Estimate.

Bad Practice

Calling around to get meaningless verbal quotes on a loan. No one can be held to a verbal quote.

Good Practice

Asking for a Good Faith Estimate so you can review all the terms of your loan offer and see the interest rate, payment, and closing costs.

Now Leanne felt like she was getting somewhere. It made sense to get something in writing. Still, she wanted to do another comparison, so she called a large mortgage lender with a good reputation.

The loan officer said, “I’d be happy to give you a Good Faith Estimate, but first I need to get your social security number and $35 so I can pull your credit report.”

“I’d like to see the Good Faith Estimate first,” said Leanne. She didn’t want to shell out $35 and have her credit pulled when she wasn’t sure if this would be a good offer.

The loan officer said, “Oh, I can’t give you that until I run your credit report. I can take Visa or MasterCard for the deposit; which do you prefer?”

“My credit is perfect. There should be no problem. Can I just see the Good Faith Estimate first?”

“I’m sorry; it doesn’t work that way. I have no way of being able to give you an accurate quote without seeing your credit scores. This is the way it works,” said the loan officer.

“Not for everyone. I just got a Good Faith Estimate from a mortgage broker, and he didn’t pull my credit,” Leanne said. “I’m not about to give out my social security number when I don’t even know what all the fees are. I need to compare loan offers first.”

Bad Practice

Divulging your social security number and paying a credit report fee before you’ve reviewed and approved the Good Faith Estimate.

Good Practice

Getting your Good Faith Estimate before depositing money with the lender.

Now she was annoyed. Even though she explained her credit was excellent, she couldn’t even get a decent quote without having her personal credit report pulled? It didn’t seem right.

Before hanging up, Leanne asked, “By the way, what is the Yield Spread Premium for that interest rate you gave me?”

“Oh, the Yield Spread Premium? Why do you ask? Um, that’s not something you pay for, so, um, it really doesn’t matter to you, um, you don’t have to concern yourself with that. Ha-ha. Anyway, it won’t be determined until we get to the HUD-1, you know, the closing.”

With that pack of lies hurled at her, Leanne decided to stop in at a bank. Maybe she’d be treated better if she went in person.

The banker was all smiley and friendly, and she handed Leanne some brochures and a booklet, along with the Good Faith Estimate. But then she pointed out that in order to get this interest rate, which she said was discounted by a quarter percent, Leanne would need to switch her checking and savings account over to this bank.

Leanne noticed there was no Yield Spread Premium disclosed, so she asked.

The banker said, “We don’t have Yield Spread Premium. That’s how we, as a bank, save you money!”

What kind of balderdash is that? All lenders, including banks, can sell interest rates higher than the par rate. Being a bank doesn’t automatically equal saving money on a mortgage. Leanne learned that banks don’t call their overage a “Yield Spread Premium” so they can claim they don’t have it. Even more frustrating is that the lawmakers say only the brokers, not the banks, have to reveal their overage or back-end commission. The laws are working against the homeowner who wants transparency with their financing. The law eliminates a level playing field between banker and broker, making it harder for good citizens to compare loan offers and get the cheapest financing. What are these lawmakers thinking? Are there behind-the-scenes incentives going on that motivate them to give big banks preferential treatment?

Leanne wanted to work with the mortgage broker, but she decided she needed to put personal feelings aside and go with the cheapest Good Faith Estimate, so she set an appointment to go back to the bank to sign the paperwork and get started. She wasn’t wild about the idea of switching her checking and savings accounts, but figured it would be worth it to get the .25 lower rate. Boy, she was in for a surprise.

The banker had an “updated” Good Faith Estimate and had a hefty Discount Fee that wasn’t there before. “What’s this new fee?” she asked. “It wasn’t there before.”

“As a matter of course, I don’t put that on the initial Good Faith Estimate so as not to confuse people,” said the banker. “But don’t worry, it’s standard. Please sign and date here.”

“This is bait and switch!” Leanne said this loudly so the people standing in line for the bank tellers turned to look. Then she stood up, snatched the Good Faith Estimate off the banker’s desk, and stomped out, ignoring the banker’s protests behind her.

“Talk to my buns because it’s the last time you’ll see them,” she muttered as she pushed through the revolving door.

The next day, Leanne conducted another Internet search, and that’s when she stumbled upon my Web site. I responded to her e-mail message, and that’s how I became privy to what was going on. After our consultation, Leanne went back to the mortgage broker, the one who clued her in on getting a Good Faith Estimate in the first place and completed the preapproval. Now she was ready to go house shopping.

Leanne found a newly built home that was perfect. The builder said he’d throw in $12,000 worth of extra amenities if she used his preferred loan officer. No problem, thought Leanne.

The preferred loan officer ran her credit and provided a Good Faith Estimate. He said, “This is a discount rate that you get with us because we are approved with this fine, quality builder.”

But something was wrong. The so-called discount rate was .5 higher than every other Good Faith Estimate. And there were more fees, too. So to get the so-called free builder incentive, she had to pay more for her loan every month for the life of her loan? That was a bad deal in the long run!

About that time, Leanne learned that she needed to have her own buyer’s agent represent her; and that if she didn’t, she would almost surely pay more than needed. She decided to walk out of that rat’s nest and start over. She contacted an experienced Realtor to represent her.

Bad Practice

Going to a builder to purchase a home without having your own Realtor represent you.

Good Practice

Letting your buyer’s agent, a licensed Realtor, present your offer to the builder and negotiate the terms for you, including your right to get independent financing without giving up advertised perks.

To hasten the story, Leanne’s Realtor helped her find a charming house that had more character and a larger yard than the new construction property she’d looked at earlier. She negotiated a good Purchase Agreement, and, finally, the loan process was under way. She cooperated fully with the mortgage broker, getting him all necessary paperwork in a timely manner. I reviewed her Good Faith Estimate and confirmed that all the fees were legitimate and fair. While we were discussing her options about buying down the interest rate, I mentioned that the loan Origination Fee is income tax deductible. That’s when a brilliant idea shot out of the heavens like a bolt of lightning.

“Why not ask your mortgage broker to take out the two lender fees (the underwriting fee and the processing fee) and include them as part of the Origination Fee instead? That way, you will get to tax deduct those as well,” I said.

“What a fantastic idea! I can use all the tax deductions I can get!” she said.

The strategy worked like a charm.

So, Leanne got the lowest possible interest rate, no bogus junk fees, and even turned the mandatory lender fees into a tax deduction.

“You know, you’ve got the cheapest loan in the world,” said her mortgage broker at closing.

Once the move was behind her, Leanne reported that she and Puddles were supremely happy. She felt good to be investing in her own home and for gaining the tax advantage of having a mortgage rather than renting. Leanne painted her walls butter cream yellow and planted tulips in her yard.